Speed up your tax credits for buying a ‘green’ vehicle

The IRS just released official guidance on the 2005 energy-tax law that revamps the type of tax credits you can earn for buying environmentally friendly vehicles. (IRS Notice 2006-9)

Strategy: If you plan to buy a credit-eligible vehicle in 2006, do it sooner rather than later.

Why? Unlike the old deduction for green vehicles, this new credit phases out after the vehicle’s manufacturer sells a certain number of those vehicles.

Specifically, the credit starts to phase out beginning with the second calendar quarter following the quarter in which the manufacturer sells 60,000 of the vehicles. And with the popularity of hybrid cars and other eco-vehicles, that could happen quickly.

To claim the credit, the manufacturer must certify the vehicle as being eligible for the credit. The IRS then reviews that certification and sends an acknowledgment letter within 30 days to the manufacturer.

The credit is based on the vehicle’s fuel efficiency and can run as high as $3,400. (See box at right.) To qualify for the new tax credit, you must also:

Place the vehicle in service after 2005 and before 2011.

Be the original owner of the vehicle.

Use the vehicle predominately in the United States.

What about leasing? IRS sources have clarified that consumers who lease qualified hybrid vehicles do not directly qualify for the tax credit. But the leasing company can qualify, and it may pass along savings

How green is your credit?

The amount of your “green credit” depends on the hybrid vehicle’s fuel efficiency as determined by a complex formula. Based on initial estimates from automakers, here’s how the credits stack up for the IRS-approved list of hybrids in 2006:

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